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Affine Term-Structure Models: Theory and Implementation

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  • David Bolder

Abstract

Affine models describe the stylized time-series properties of the term structure of interest rates in a reasonable manner, they generalize relatively easily to higher dimensions, and a vast academic literature exists relating to their implementation. This combination of characteristics makes the affine class a natural introductory point for modelling interest rate dynamics. The author summarizes and synthesizes the theoretical and practical specifics relating to this analytically attractive class of models. This summary is accomplished in a self-contained manner with sufficient detail so that relatively few technical points will be left for the reader to ponder. As such, this paper represents a first step towards advancing the Bank of Canada's research agenda in this area, with a view to using these models to assist with practical debt and risk-management problems currently under study.

Suggested Citation

  • David Bolder, 2001. "Affine Term-Structure Models: Theory and Implementation," Staff Working Papers 01-15, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-15
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    References listed on IDEAS

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    17. David Bolder & David Stréliski, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
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    Cited by:

    1. Andre Lucas & Bastiaan Verhoef, 2012. "Aggregating Credit and Market Risk: The Impact of Model Specification," Tinbergen Institute Discussion Papers 12-057/2/DSF36, Tinbergen Institute.
    2. Sanford, Andrew D. & Martin, Gael M., 2005. "Simulation-based Bayesian estimation of an affine term structure model," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 527-554, April.
    3. David Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
    4. Fendel, Ralf, 2008. "A Joint Characterization of German Monetary Policy and the Dynamics of the German Term Structure of Interest Rates," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 4(1-2), pages 1-19.
    5. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    6. Guillermo Andrés Cangrejo Jiménez, 2014. "La Estructura a Plazos del Riesgo Interbancario," Documentos de Trabajo 012172, Universidad del Rosario.
    7. Daniela Neykova & Marcos Escobar & Rudi Zagst, 2015. "Optimal investment in multidimensional Markov-modulated affine models," Annals of Finance, Springer, vol. 11(3), pages 503-530, November.
    8. Paccagnini, Alessia, 2016. "The macroeconomic determinants of the US term structure during the Great Moderation," Economic Modelling, Elsevier, vol. 52(PA), pages 216-225.
    9. Fendel, Ralf, 2004. "Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates," Discussion Paper Series 1: Economic Studies 2004,24, Deutsche Bundesbank.
    10. Zbynek Stork, 2016. "Term Structure of Interest Rates: Macro-Finance Approach," EcoMod2016 9566, EcoMod.
    11. Chiara Peroni, 2012. "Testing linearity in term structures," Applied Financial Economics, Taylor & Francis Journals, vol. 22(8), pages 651-666, April.
    12. David Bolder & Simon Deeley, 2011. "The Canadian Debt-Strategy Model: An Overview of the Principal Elements," Discussion Papers 11-3, Bank of Canada.
    13. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.
    14. Berg, Tobias, 2010. "The term structure of risk premia: new evidence from the financial crisis," Working Paper Series 1165, European Central Bank.
    15. David Bolder & Shudan Liu, 2007. "Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective," Staff Working Papers 07-49, Bank of Canada.
    16. Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.
    17. Yang Chang & Michael Sherris, 2018. "Longevity Risk Management and the Development of a Value-Based Longevity Index," Risks, MDPI, Open Access Journal, vol. 6(1), pages 1-20, February.
    18. David Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Staff Working Papers 07-13, Bank of Canada.
    19. Chadha, Jagjit S. & Waters, Alex, 2014. "Applying a macro-finance yield curve to UK quantitative Easing," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 68-86.
    20. Gary Venter & Kailan Shang, 2019. "Building and Testing Yield Curve Generators for P&C Insurance," Papers 1912.10526, arXiv.org.
    21. Somvang PHIMMAVONG & Ian FERGUSON & Barbara OZARSKA, 2010. "Economy-Wide Impact of Forest Plantation Development in Laos Using a Dynamic General Equilibrium Approach," EcoMod2010 259600131, EcoMod.
    22. Peter Spreij & Enno Veerman & Peter Vlaar, 2008. "Multivariate Feller conditions in term structure models: Why do(n't) we care?," DNB Working Papers 173, Netherlands Central Bank, Research Department.
    23. Bellini, Tiziano & Riani, Marco, 2012. "Robust analysis of default intensity," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3276-3285.
    24. Argyropoulos, Efthymios & Tzavalis, Elias, 2015. "Real term structure forecasts of consumption growth," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 208-222.
    25. Robert Jarrow & Hao Li, 2014. "The impact of quantitative easing on the US term structure of interest rates," Review of Derivatives Research, Springer, vol. 17(3), pages 287-321, October.

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    More about this item

    Keywords

    Interest rates; Econometric and statistical methods; Debt management;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G0 - Financial Economics - - General

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